US repatriation of profits and its impact on Chile

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American multinationals are significant investors in the Chilean market. Roberto Carlos Rivas and Gregorio Martínez of PwC look at how prepared Chile and its tax laws are for a return of corporate profits to the US under President Trump’s tax reform.

President Trump has since the beginning of his campaign
intended to cut the corporate tax rate from 35% to 15%. The
president has said that with lowering corporate taxes, the
country could increase workers' wages and bring back trillions
of dollars in cash which is currently parked overseas. A
one-time repatriation of corporate profits at a reduced rate
has also been proposed. It is estimated that US companies
currently hold around $2.5 trillion overseas. There has been no
recent confirmation regarding the rate, although 10% was
mentioned during the campaign.

Said incentives to return funds to the US, if materialised,
may bring an important flow of funds from countries where US
companies have important investments.

From a Chilean perspective, a recent tax reform modified the
total tax burden applicable on distributed corporate earnings
under the partially integrated system from 35% to 44.45%. Said
increase was accompanied by a permanent rule that establishes
that the tax burden increase does not apply to dividends paid
to countries with which Chile has a tax treaty in force. Chile
does not have a tax treaty in force with the US.

A temporal rule establishes that the increased tax burden
does not apply to dividends paid to a country with which Chile
has a signed (but not yet approved) tax treaty until December
2019. Such is the case of dividends paid to the US, so at the
moment the total tax burden is 35% for US investors in
Chile.

A tax bill in discussion at the Chilean parliament increases
the later term until December 2021, postponing a tax burden
increment that would apply to dividends paid from Chile to the
US.

Having said the above, it would be fair to argue that there
seems to be attractive tax savings incentives in the future for
US multinationals for bringing foreign profits back to their
home country, either via making US activities more profitable
than before or via a direct repatriation to the US of dividend
income already earned or accrued abroad by the multinational.
Knowing that US multinationals are significant foreign
investors into the Chilean market, and in the context of this
prospective future flow of funds from Chile to the US, Chilean
tax authorities will likely put their audit and control efforts
into this area going forward. This would also apply to other
jurisdictions in similar positions.

Making a basic summary of the main Chilean tax rules
applicable to cross-border transactions, it can be said that
our standard 35% final tax burden should apply to dividends
remittances from Chile to abroad (taking into account the
above-mentioned clarifications). Additionally, there are
several other rates available, applicable depending on the type
of income paid to abroad. For example, royalties for the use of
trademarks is 30%, interest income could be 4%, technical
assistances 15%, industrial designs 15%, software 15%, and
standard software 0%. There are no withholding taxes applicable
on the importation of physical assets, as long as the
arm's-length principle is duly fulfilled.

Transfer pricing

Chile is an OECD member country and, as such, it has
transfer pricing rules following, in general terms, the OECD TP
Guidelines. These rules have been strictly applied over
cross-border operations, where it has been carefully reviewed
that the profitability of Chilean entities is not transferred
to abroad under a different title. Moreover, together with the
local transfer pricing rules which have been in force since
2012, Chile has been very active in adapting its legislation to
conform to the OECD's BEPS project.

In this context, in December 2016 the transfer pricing
annual affidavit and the country-by-country report were updated
through Resolution number 126 published by the Chilean Internal
Revenue Service.

There is also a tax bill which will update the rules
regarding information exchange. This will ease the exchange of
information with foreign tax authorities, updating Chile's
information exchange tools to the context of the Convention on
Mutual Administrative Assistance in Tax Matters.

Should the proposed US legislation comes into force, we
expect Chilean tax authorities to increase tax audit processes
of US multinationals with business in Chile. This would be in
order to control that cross-border intercompany transactions
eroding the taxable basis of the local taxpayer are duly
documented and in line with the arm's-length principle under
local TP rules.

Although there are no particular foreseen modifications to
the Chilean tax and TP rules, current tax legislation provides
reasonable control measures to Chilean tax authorities for, in
the context of future audit processes, applying tax adjustments
over intercompany transactions that are mainly driven to
increase movements of profits from Chile to abroad.

Roberto is a partner at the tax and legal services
department of PwC Chile.

During 2001 and 2002 he obtained a master's degree
in law in international taxation at Leiden University
in the Netherlands.

During 2002 and 2003 he went on secondment to the
international taxation department of PwC in Rotterdam,
the Netherlands, taking an active part in international
tax planning projects concerning investments between
Europe and Latin America.

He joined PwC in April 1993 and he has also been
assigned to PwC Buenos Aires. He is a transfer pricing
expert.

Roberto is a member of the IFA in Chile and he has
written many articles on international tax matters. He
has been a lecturer in international tax seminars
taking place in Rotterdam, Amsterdam, Barcelona, Buenos
Aires, Punta del Este and Santiago.